How does MREL differ from TLAC and apply to European banks?

Question

AcadiFi · Accepted Answer

MREL (Minimum Requirement for Own Funds and Eligible Liabilities) is the European Union's resolution capacity regime under the Bank Recovery and Resolution Directive (BRRD). Unlike TLAC which applies only to G-SIBs globally, MREL applies to all EU banks proportional to resolution strategy.

MREL has two components calibrated by the Single Resolution Board (SRB):
- **Loss Absorption Amount (LAA)**: typically equal to Pillar 1 capital + P2R + combined buffer requirement.
- **Recapitalization Amount (RCA)**: the capital needed to relaunch the bank post-resolution, usually LAA again minus certain adjustments.

Example: Stellbach Kredit Group, a mid-size EU bank not G-SIB-rated, has 8% + 2.0% P2R + 3.0% buffers = 13% capital requirement. MREL = LAA 13% + RCA ~11% − market confidence deduction = roughly 23-25% of RWA. G-SIBs in the EU face the higher of MREL and TLAC (18%), with MREL typically binding.

Eligible instruments: own funds (CET1/AT1/T2) plus senior non-preferred, senior unsecured above creditor hierarchy threshold, contractually subordinated notes — all meeting BRRD eligibility (at least 1-year residual, no acceleration, bail-in recognition).

```mermaid
flowchart LR
  A[MREL Requirement] --> B[LAA Loss Absorption]
  A --> C[RCA Recapitalization]
  B & C --> D[Own Funds]
  B & C --> E[Eligible Senior Non-Preferred]
  B & C --> F[Subordinated Debt]
```

Breach triggers: MREL shortfalls lead to restrictions on distributions via Maximum Distributable Amount for MREL (M-MDA), introduced to parallel the capital MDA. European banks have issued €900B+ of MREL-eligible senior non-preferred since 2016 — a new asset class with pricing between Tier 2 and senior preferred.

How does MREL differ from TLAC and apply to European banks?

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